Should Real Estate Agents Incorporate? Here’s How to Decide
On this blog, we often talk about how real estate agents are like entrepreneurs.
Entrepreneurs make their own schedule. They wear all the hats, from marketing to accounting to management. And, most importantly, they are responsible for every dollar that comes in (… or doesn’t).
There’s just one thing that many entrepreneurs do that many real estate agents don’t:
In many parts of Canada, and throughout the U.S., REALTORs® are allowed to form their own corporations.
Whether they should is a personal decision, one based on many factors.
Those factors are what we’re going to explore today.
Keep reading to learn about what incorporating means for real estate agents, and why you might want to consider it.
Important note: the following information is based on incorporation in Canada; details may differ for American readers.
First — What Does It Mean to Incorporate?
Incorporating essentially means turning your business into a legal entity that’s separate from you, the owner.
It’s a form of business, alongside other forms like:
- a sole proprietorship, the simplest form, owned by one person with no legal distinction between the owner and the company; and
- a partnership, which is a business entity owned by two or more people, with no legal distinction between the owners and the company.
In Canada, real estate agents who choose to incorporate form a PREC — a Personal Real Estate Corporation.
Why You Should Consider Incorporating
Incorporating isn’t just about looking official (although that certainly plays a part). It does come with some real advantages. Let’s explore.
As a real estate agent, you owe your clients a certain level of duty and care.
If you don’t deliver on that, and your client suffers some kind of harm or damage because of your behaviour, guess what? You could be found negligent and held liable.
If that happens and you’re not incorporated, your personal assets could be at risk.
If that happens and you are incorporated, you as a person are protected. They can go after your incorporated business’ assets, but not your personal assets.
This kind of division is a layer of protection that you just don’t have unless you’re incorporated.
Personal income and small business corporation income are taxed differently in Canada.
The rates differ from province to province, but let’s look at Ontario as an example of how it works.
In Ontario, small business corporation income of up to $500,000 is taxed at 12.2% (that’s the combined federal and provincial rate).
Income earned personally is a different story. The rate (combined federal and Ontario) is 29.65% at $50,000, 43.41% at $100,000, and 48.29% at $200,000.
What does this all translate to? It means that incorporated real estate agents can defer paying tax on their income.
You would only pay personal tax rates on the funds you withdraw from the corporation as dividends or a salary. Excess income can stay in the corporation, reinvested in the business or kept as savings, which can be invested in things like mutual funds, bonds or real estate.
Income splitting and sharing
Your family members are allowed to own non-voting shares of your PREC. Which means you could pay them dividends.
Got a spouse who’s a whiz at social media? You could hire them to manage your real estate Instagram account and pay them a salary. Whatever you pay them would be taxed at their personal tax rate.
This perk of incorporation is very personal and whether it truly is a perk or not will depend on a real estate agent’s (and their family’s) unique circumstances. Best to get professional, personalized advice.
Why Incorporating May Not Be For You
Forming a PREC isn’t a no-brainer for every real estate agent. While there are some solid advantages to consider, it’s also not the only way to run a successful, profitable real estate business.
Let’s take a look at the possible disadvantages of incorporating.
The extra work
Incorporating doesn’t just happen with a click of a button.
First, there’s research to be done. Starting with looking into whether you’re considered an independent contractor or an employee of your brokerage (this article can help).
You’ll also want to consult with a professional to get a personalized sense of whether the tax deferral benefits and income splitting potential will be worth it for you.
Then there’s the actual work involved with registering. The forms. After that, ongoing paperwork. A different level of bookkeeping and accounting. And so on. And so on.
As they say: the juice has gotta be worth the squeeze.
Incorporating can save you money (in the ways we covered earlier), but it also comes with costs.
There’s a cost involved in set-up. Then there are the additional accounting and bookkeeping costs (if you’re already working with these service providers, the fees may be higher once you’re incorporated).
Are they a deal-breaker? Maybe not. But again: the juice has gotta be worth the squeeze.
So, What’s the Right Move?
It all depends on your unique real estate business. There’s not one answer that applies to all agents.
Incorporating can come with advantages. But it may also not be worth the extra set-up, work and costs for some agents. And like we said earlier, it’s not the only way to run a successful business.
If this post has you curious about incorporating as a real estate agent, the next best thing would be to seek professional advice from a lawyer and/or accountant.
If you’re incorporated, how did you decide it was right for your real estate business?